Tag Archives: s-k

Jeepers, You Say There is More Non-GAAP News?

In the latest step in the SEC’s continuing efforts to, in the words of Corp Fin Chief Accountant Mark Kronforst, “crack down” on the inappropriate use of non-GAAP measures, on May 17, 2016 the SEC updated their Compliance and Disclosure Interpretations about the use of non-GAAP measures.

(At this point we almost want to apologize for how many recent posts we have done about non-GAAP measures, but this new guidance is important.)

You will find them at:

www.sec.gov/divisions/corpfin/guidance/nongaapinterp.htm

If you use non-GAAP measures anywhere, earnings releases, MD&A, wherever, read them!

To help you get started, here are a couple of highlights.

This first question is a broad theme in current SEC public remarks, as we have discussed them in recent posts:

Question 100.01

Question: Can certain adjustments, although not explicitly prohibited, result in a non-GAAP measure that is misleading?

Answer: Yes. Certain adjustments may violate Rule 100(b) of Regulation G because they cause the presentation of the non-GAAP measure to be misleading. For example, presenting a performance measure that excludes normal, recurring, cash operating expenses necessary to operate a registrant’s business could be misleading. [May 17, 2016]

This C&DI clarifies issues about per-share presentations:

 

Question 102.05

Question: While Item 10(e)(1)(ii) of Regulation S-K does not prohibit the use of per share non-GAAP financial measures, the adopting release for Item 10(e), Exchange Act Release No. 47226, states that “per share measures that are prohibited specifically under GAAP or Commission rules continue to be prohibited in materials filed with or furnished to the Commission.” In light of Commission guidance, specifically Accounting Series Release No. 142, Reporting Cash Flow and Other Related Data, and Accounting Standards Codification 230, are non-GAAP earnings per share numbers prohibited in documents filed or furnished with the Commission?

 

Answer: No. Item 10(e) recognizes that certain non-GAAP per share performance measures may be meaningful from an operating standpoint. Non-GAAP per share performance measures should be reconciled to GAAP earnings per share. On the other hand, non-GAAP liquidity measures that measure cash generated must not be presented on a per share basis in documents filed or furnished with the Commission, consistent with Accounting Series Release No. 142. Whether per share data is prohibited depends on whether the non-GAAP measure can be used as a liquidity measure, even if management presents it solely as a performance measure.  When analyzing these questions, the staff will focus on the substance of the non-GAAP measure and not management’s characterization of the measure. [May 17, 2016]

 

As always, your thoughts and comments are welcome.

The SEC Comment Process – What if?

In all our workshops and seminars, when we discuss the SEC review process we always emphasize that when you get a comment from the staff you do NOT immediately change disclosure in response to the comment. As the staff says in their on-line “Filing Review Process” document, they view the process of issuing comments as a “dialogue with a company about its disclosure”.

You can find the filing review process document, which is updated on a regular basis at:

www.sec.gov/corpfin/Article/filing-review-process—corp-fin.html

 

To illustrate, here is a real life comment example.

 

STEP ONE – COMMENT RECEIVED

What would you do if you received this comment?

 

Reportable Segments, page 39

  1. Your segment discussion and analysis only refers to non-GAAP amounts. Pursuant to Item 10(e) of Regulation S-K, we remind you that more prominence should not be given to non-GAAP financial measures compared to GAAP financial measures. In this regard, please revise your discussion and analysis to first provide a discussion of the corresponding GAAP amounts for each segment ensuring equal prominence to that of your non-GAAP amounts.

The comment uses the language “please revise”, which is a bit scary, and in the back of our minds we hope we can push the comment to an “in future filings” comment if we decide the staff is on-point. The comment is focused on the use of non-GAAP measures in MD&A as discussed in operating segment disclosures. Of course, the use of non-GAAP measures in segment disclosures is appropriate if in fact your chief operating decision maker uses non-GAAP information. So, your first step in the research process for this comment might be to go review that part of ASC 280.

 

 

STEP TWO – REVIEW GAAP LITERATURE

Here is the relevant section:

Measurement

50-27     The amount of each segment item reported shall be the measure reported to the chief operating decision maker for purposes of making decisions about allocating resources to the segment and assessing its performance. Adjustments and eliminations made in preparing a public entity’s general-purpose financial statements and allocations of revenues, expenses, and gains or losses shall be included in determining reported segment profit or loss only if they are included in the measure of the segment’s profit or loss that is used by the chief operating decision maker. Similarly, only those assets that are included in the measure of the segment’s assets that is used by the chief operating decision maker shall be reported for that segment. If amounts are allocated to reported segment profit or loss or assets, those amounts shall be allocated on a reasonable basis.

ASC 280 then goes on to require disclosure about the measurement basis used for segment disclosures:

50-29     A public entity shall provide an explanation of the measurements of segment profit or loss and segment assets for each reportable segment. At a minimum, a public entity shall disclose all of the following (see Example 3, Cases A through C [paragraphs 280-10-55-47 through 55-49]):

  1. The basis of accounting for any transactions between reportable segments.
  2. The nature of any differences between the measurements of the reportable segments’ profits or losses and the public entity’s consolidated income before income taxes, extraordinary items, and discontinued operations (if not apparent from the reconciliations described in paragraphs 280-10-50-30 through 50-31). Those differences could include accounting policies and policies for allocation of centrally incurred costs that are necessary for an understanding of the reported segment information.
  3. The nature of any differences between the measurements of the reportable segments’ assets and the public entity’s consolidated assets (if not apparent from the reconciliations described in paragraphs 280-10-50-30 through 50-31). Those differences could include accounting policies and policies for allocation of jointly used assets that are necessary for an understanding of the reported segment information.
  4. The nature of any changes from prior periods in the measurement methods used to determine reported segment profit or loss and the effect, if any, of those changes on the measure of segment profit or loss.
  5. The nature and effect of any asymmetrical allocations to segments. For example, a public entity might allocate depreciation expense to a segment without allocating the related depreciable assets to that segment.

 

ASC 280 also includes this reconciliation requirement:

 

50-30     A public entity shall provide reconciliations of all of the following (see Example 3, Case C [paragraphs 280-10-55-49 through 55-50]):

  1. The total of the reportable segments’ revenues to the public entity’s consolidated revenues.
  2. The total of the reportable segments’ measures of profit or loss to the public entity’s consolidated income before income taxes, extraordinary items, and discontinued operations. However, if a public entity allocates items such as income taxes and extraordinary items to segments, the public entity may choose to reconcile the total of the segments’ measures of profit or loss to consolidated income after those items.
  3. The total of the reportable segments’ assets to the public entity’s consolidated assets.
  4. The total of the reportable segments’ amounts for every other significant item of information disclosed to the corresponding consolidated amount. For example, a public entity may choose to disclose liabilities for its reportable segments, in which case the public entity would reconcile the total of reportable segments’ liabilities for each segment to the public entity’s consolidated liabilities if the segment liabilities are significant.

 

With this, our review of the relevant GAAP literature is well underway, and substantially complete.

 

STEP THREE – REVIEW THE RELEVANT SEC NON-GAAP GUIDANCE

As you research the SEC’s requirements surrounding the use of non-GAAP measures, most of us are familiar with Reg G, which applies to non-GAAP measures in documents that are not filed, such as earnings releases. But this comment is about S-K Item 10(e) which applies to non-GAAP measures included in MD&A. As you read Item 10(e) you would find:

(5) For purposes of this paragraph (e), non-GAAP financial measures exclude financial measures required to be disclosed by GAAP, Commission rules, or a system of regulation of a government or governmental authority or self-regulatory organization that is applicable to the registrant. However, the financial measure should be presented outside of the financial statements unless the financial measure is required or expressly permitted by the standard-setter that is responsible for establishing the GAAP used in such financial statements.

Where to go from here? Lets get into the specific facts in the company’s Form 10-K.

 

 

STEP FOUR – APPLY THE RESEARCH TO THE COMPANY’S DISCLOSURES

Here is an excerpt from the company’s segment note:

 

“We prepared the financial results for our reportable segments on a basis that is consistent with the manner in which we internally disaggregate financial information to assist in making internal operating decisions. We included the earnings of equity affiliates that are closely associated with our reportable segments in the respective segment’s net income. We have allocated certain common expenses among reportable segments differently than we would for stand-alone financial information. Segment net income may not be consistent with measures used by other companies. The accounting policies of our reportable segments are the same as those applied in the consolidated financial statements.”

Here is an excerpt from the MD&A disclosure that the SEC comment is focused on:

When compared to the same period last year, core earnings increased in the twelve months ended December 31, 2013 by $202 million, or 13%, driven by the following items:

 

· Higher core earnings in the Optical Communications, Life Sciences,

Environmental Technologies and Display Technologies segments in the

amounts of $59 million, $44 million, $11 million and $7 million, respectively; and

·  

Lower operating expenses in the amount of $49 million, driven by a decrease in

variable compensation and cost control measures implemented by our segments.

 

You can find the company’s Form 10-K at:

files.shareholder.com/downloads/glw/1822865217x0xS24741%2D15%2D15/24741/filing.pdf

 

You can read the issues the SEC is commenting about in MD&A on page 39, and the segment note starts on page 137.

At this point we are ready to make an informed judgment about the comment. And this one follows a really twisty path! First, the MD&A clearly includes non-GAAP measures for “core” operations. And, interestingly, these are not the measures that are disclosed in the segment note in the financial statements. Since the measures used in the MD&A are not in the segment note the provision in S-K Item 10(e) excluding disclosures required under GAAP does not apply, and so the company must comply with the provisions. The next step is to, as we said above, make a case with the staff that it will be appropriate to fix this comment in future filings and not amend the current Form 10-K.

 

STEP FIVE – RESPOND TO THE COMMENT

Here is the company’s response to the comment, and the staff did allow this to become a future filings comment:

We acknowledge the Staff’s comments and, beginning with our Form 10-Q filed for the second quarter of 2014, will revise our future disclosure to ensure that more prominence is not given to non-GAAP financial measures when compared to GAAP financial measures.  With respect to the request to revise our discussion and analysis to first provide a discussion of the corresponding GAAP amounts for each segment, we provide the following updated disclosure, which we propose to use in future filings.

You can read the response letter and the complete version of the response to comment 8 including the proposed disclosure at:

 

www.sec.gov/Archives/edgar/data/24741/000002474114000025/filename1.htm

 

 

As always, your thoughts and comments are welcome!

Comment of the Week – Market Risk Reminder

 

We have been discussing the topic of Market Risk Disclosures a lot in this environment of volatile exchange rates, bumpy commodity prices and uncertain interest rates. This disclosure is one of the most confusing parts of Regulation S-K. Without going into a whole lot of details about S-K Item 305 (which we covered in an earlier blog at seciblog.pli.edu/?p=489), as we move towards the end of the first quarter it will continue to be important to focus on getting this disclosure right.

 

So, with this post as a reminder, here is a quick example in a recent comment:

Item7A. Quantitative and Qualitative Disclosures About Market Risk, page 63

  1. Please provide an analysis on whether your “cash flow hedges,” discussed in the second- to-last paragraph of page 63, are material, such that you would need to provide the disclosure in Item 305(a) of Regulation S-K. Please see General Instruction 5.B to Item 305(a) and (b).

 

As usual, your thoughts and comments are welcome!